National Foundation for Cancer Research v. A.G. Edwards & Sons, Inc.

• Decision Date: 26 June 1987
• Docket Number: No. 86-7006,86-7006
• Parties: , RICO Bus.Disp.Guide 6670 NATIONAL FOUNDATION FOR CANCER RESEARCH v. A.G. EDWARDS & SONS, INC., Appellant, Harold T. Hedges.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 772

821 F.2d 772

261 U.S.App.D.C. 284, RICO Bus.Disp.Guide 6670

NATIONAL FOUNDATION FOR CANCER RESEARCH v. A.G. EDWARDS & SONS, INC., Appellant, Harold T. Hedges.

No. 86-7006.

United States Court of Appeals, District of Columbia Circuit.

Argued April 30, 1987.

Decided June 26, 1987.

Terry L. Claassen, for appellant. Arthur L. Smith, Washington, D.C., was on the brief for appellant.

Wyatt B. Durrette, Jr., Washington, D.C., of the Bar of the Commonwealth of

Virginia, pro hac vice by special leave of Court, with whom Charles R. McCarthy, Jr., Washington, D.C., was on the brief for appellee.

Before MIKVA and WILLIAMS, Circuit Judges, and WEIGEL, ^* Senior District Judge.

Opinion for the Court filed by Circuit Judge MIKVA.

MIKVA, Circuit Judge:

Claiming unlawful handling of its securities margin account, National Foundation for Cancer Research (NFCR) brought suit against appellant, A.G. Edwards & Sons, Inc. (Edwards), alleging federal securities, RICO, and pendent common law claims. Over three years later, Edwards moved to compel arbitration of NFCR's non-federal securities law claims and for a stay of proceedings pending arbitration. When the district court denied the motion, holding that Edwards had waived its right to arbitrate by actively participating in the lawsuit, this interlocutory appeal followed. We affirm.

I. BACKGROUND

In June of 1980, NFCR established a securities margin account with Edwards, a stock brokerage firm. Upon opening the account, NFCR signed a customer agreement one provision of which stated that any controversy between NFCR and Edwards or any of its officers, directors, agents, or employees arising out of the brokerage relationship shall be settled by arbitration. The arbitration provision specifically excluded "any controversy involving a non-spurious claim under federal securities laws."

On January 14, 1983, NFCR commenced its lawsuit, filing a ten-count complaint against Edwards and one of its employee brokers; the suit alleged violations of both federal securities laws and common law arising from trading activity in NFRC's account. After almost two years, during which the parties conducted extensive discovery, the district court granted NFCR leave to amend its complaint to add a count alleging violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1961 et seq. (1982) (RICO). Shortly thereafter, on October 26, 1984, Edwards moved for summary judgment on all but one of the eleven counts of NFCR's amended complaint. The parties argued the motion on February 1, 1985, and the district court took the matter under advisement. No further discovery was conducted.

On March 4, 1985, the Supreme Court issued its decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), rejecting the so-called "intertwining doctrine." Several federal courts had adopted this doctrine, which held that when arbitrable contract claims and non-arbitrable federal securities laws claims arise out of the same transaction and are sufficiently intertwined factually and legally, the court should deny arbitration of the contract claims in order to preserve its exclusive jurisdiction over the federal securities claims.

Almost a year after the Supreme Court's decision in Byrd, on February 27, 1986, the district court denied Edwards' summary judgment motion. Following the court's ruling, counsel for the parties met in the trial judge's chambers to discuss settlement and further scheduling. After settlement discussions proved fruitless, counsel for the parties agreed at the meeting to docket the action for jury trial. Specifically, counsel agreed to hold a final pretrial conference on July 21, 1986 and to commence trial on September 16, 1986.

Eleven days after the status/settlement conference, on April 15, 1986, Edwards wrote to NFCR to request for the first time that all claims and controversies other than those involving "non-spurious claims under the federal securities laws" be submitted to arbitration. NFCR refused. On April 29, 1986, Edwards filed a motion to In an unpublished memorandum order, the district court denied Edwards' motion. See National Foundation for Cancer Research v. A.G. Edwards & Sons, Inc., Civ. Action No. 83-00084 (D.D.C. July 9, 1986) (NFCR Order). Relying on Cornell & Co. v. Barber & Ross Co., 360 F.2d 512 (D.C. Cir.1966), the court held that Edwards had waived its right to arbitrate. The court recounted the extensive pretrial procedures in which Edwards had taken part and concluded that "one could not imagine a clearer example of 'active participation in a lawsuit.' " NFCR Order at 2 (quoting Cornell ). The court added that "Edwards' three-year silence on the question of arbitration provides a deafening response to the question of whether it acted 'inconsistently' with an intent to arbitrate." Id. at 3. In addition, the court found that permitting arbitration at this stage of the proceedings would prejudice NFCR. The court reasoned that the extensive discovery already afforded Edwards had placed the parties "in a radically different posture from what they would have been [in] had arbitration been requested at the outset," and, moreover, that sending the proceedings to arbitration would cause further delay in resolving NFCR's suit. Id. Finally, the court rejected Edwards' contention that its tardiness in seeking arbitration was due to and excused by its uncertainty regarding the outcome of Byrd. The court observed that Edwards' argument did not explain why Edwards had waited for 13 months after the Byrd decision to file its motion, or why Edwards had not moved to compel arbitration prior to Byrd and relied on the applicable controlling pre-Byrd precedent in this circuit.

compel arbitration and to stay or sever the remaining non-arbitrable counts of the complaint.

After the court denied Edwards' motion for reconsideration, Edwards sought review of the court's orders in this court. The district court has stayed the proceedings, at Edwards' request, pending our resolution of Edwards' interlocutory appeal.

II. DISCUSSION

The issue in this case is whether the undisputed facts of appellant's pretrial participation in the litigation served to waive its right to arbitration. The question of waiver is one of law, which we review de novo. See Miller Brewing Co. v. Fort Worth Distributing Co., 781 F.2d 494, 496 (5th Cir.1986); Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 693 (9th Cir.1986).

In urging reversal of the district court, appellant argues that it did not waive its right to compel arbitration of those claims that fall within the scope of its arbitration agreement with NFCR by participating in the litigation. More specifically, Edwards contends that it did not have a clear right to compel arbitration of those claims at the time NFCR filed its complaint; that its right to arbitrate became clear only after the Supreme Court's decision in Byrd and its conduct thereafter was not inconsistent with that right; and that, in any event, NFCR has suffered no prejudice from the delay in demanding arbitration.

We cannot agree that any of these points justify a reversal of the district court's decision. The right to arbitration, like any contract right, can be waived. See Cornell, 360 F.2d at 513. The Supreme Court has made clear that the "strong federal policy in favor of enforcing arbitration agreements" is based upon the enforcement of contract, rather than a preference for arbitration as an alternative dispute resolution mechanism. Byrd, 470 U.S. at 218-24, 105 S.Ct. at 1241-44. Thus, the question of whether there has been waiver in the arbitration agreement context should be analyzed in much the same way as in any other contractual context. The essential question is whether, under the totality of the circumstances, the defaulting party has acted inconsistently with the arbitration right. See Cornell, 360 F.2d at 513. Supreme Court pronouncements suggest that if there were any ambiguity as to the scope of the waiver, we would be obliged to resolve the issue in favor of arbitration. See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 In Cornell, this court held that one example of conduct inconsistent with the right to arbitrate is active participation in a lawsuit. See 360 F.2d at 513. The defendant in Cornell had moved for transfer of venue, filed an answer to the complaint and a counterclaim, taken a deposition of an official of the plaintiff company, and procured the production of numerous documents before communicating an intention to arbitrate to the plaintiff. We inferred from this conduct that the defendant had waived its right to arbitrate. Because the defendant could have sought arbitration rather than opposing the complaint on the merits, its decision to litigate was seen as an affirmative choice of the judicial forum and an abandonment of the right to seek arbitration.

L.Ed.2d 765 (1983). However, no such issue arises here; the only issue is whether there has been waiver. We find that Edwards' conduct in this case was clearly inconsistent with any intent to assert its right to arbitrate. Edwards' actions thus compel the conclusion that appellant has waived that right.

In this case, Edwards had invoked the litigation machinery to an even greater extent before demanding that NFCR arbitrate its non-federal securities law claims. After filing an answer to NFCR's original complaint in which it asserted fifteen affirmative defenses (with no mention of arbitration), Edwards instigated extensive discovery. Edwards obtained the production of numerous NFCR documents and deposed six of NFCR's officers, directors, and employees as well as one of NFCR's outside auditors. During the same period, Edwards produced certain of its officers and employees for deposition by NFCR. Edwards thereafter opposed NFCR's motion to amend its complaint to add a RICO cl...